The Case of Soeharto's Mayors in Indonesia

An Empirical Investigation of the Legacies of Non-Democratic Regimes: The Case of Soeharto's Mayors in Indonesia∗ Monica Martinez-Bravo Priya Mukherjee Andreas Stegmann CEMFI College of William & Mary CEMFI January 25th, 2016 Abstract A large theoretical literature argues that legacies of non-democratic regimes can affect the quality of governance in new democracies. However, the empirical evidence is scarce. This paper exploits a natural experiment that took place in the Indonesian democratic transition: the Soeharto-regime mayors were allowed to finish their five year terms before being replaced by new leaders. Since mayors' political cycles were not synchronized, this event generated exogenous variation in how long the agents of the old regime remained in their position during the democratic transition. The results suggest that districts which had an old-regime mayor for longer exhibit worse governance outcomes, lower public good provision, and greater electoral support for Soeharto's party. These effects persist several years after the old-regime mayors are no longer in office. The results are consistent with the hypothesis that slower transitions towards democracy allow the old-regime elites to find ways of capturing democracy in the medium and long run. JEL Classification: D72, H75, O12, P16 ∗We would like to thank Daron Acemoglu, Manuel Arellano, Ben Olken, Abhijit Banerjee, Diego Puga, Guillermo Caru- ana, Nancy Qian, Eliana La Ferrara, Pascaline Dupas, Noam Yuchtman, Frederico Finan, Ernesto Dal Bó,Claudio Ferraz, Nick Ryan, Stephan Litschig, Tom Pepinsky, Steve Coate, and Kaushik Basu for valuable suggestions. We also thank seminar participants at UniversitàBocconi, Stanford GSB, Oxford University, Yale University, RIDGE/LACEA-PEG Workshop, Uni- versity of California-Berkeley HAAS, Workshop on the Political Economy of Development and Conflict III -UPF, Barcelona GSE Summer Forum, World Congress of the Econometric Society, Aalto University, University of Vienna, Yale Conference of Political Economy, NEUDC-2015, and Science Po-PSE for their comments. We also thank Neil McCulloch, KPPOD, and the Asia Foundation for producing and sharing their data on the quality of governance in Indonesia. Gustavo Fajardo, Nia Riddick, and Julie Gordonson provided excellent research assistance. Monica gratefully acknowledges financial support from FundaciónRamon Areces. Monica Martinez-Bravo; email: mmb@cemfi.es. Priya Mukherjee; email: [email protected]. Andreas Stegmann; email: stegmann@cemfi.edu.es. 1 Introduction Since the early 1990s most countries in the world have had political systems that are defined as democratic. However, democracies widely differ on the quality of their political institutions. Oftentimes elites and powerful interest groups retain a disproportionate amount of influence over the policy making process. The empirical evidence suggests that young democracies are particularly prone to elite capture.1 A potential reason for the greater extent of elite capture in young democracies is the presence of legacies of the previous nondemocratic regime: A new democracy can inherit a constitution, a number of laws and regulations, a large army, or an inefficient bureaucracy from the previous regime. These legacies could increase the amount of de facto power that old-regime elites have and, consequently, allow them to continue to control the decisions over policies and economic institutions taken during the democratic period.2 The idea that nondemocratic legacies can facilitate elite capture in weakly institution- alized polities has been previously described in the political science literature3 and more recently formalized in a growing theoretical literature in economics.4 However, the empirical evidence on the presence of these legacies or on their effects is scarce. Furthermore, we have a limited understanding of how the influence of these legacies depends on the characteristics of the democratic transition. In this paper, we exploit a natural experiment that took place in the Indonesian transition to democracy that affected the degree to which old-regime elites could capture local power. In 1998 the regime of General Soeharto came to an end. However, the Soeharto-appointed district mayors were not immediately replaced by democratically elected leaders. Instead, they were allowed to finish their five year terms before new elections were called for. Since the timing of appointments of Soeharto mayors was different across districts, this event generated exogenous variation in how long these mayors remained in office during the democratic transition. The presence of Soeharto mayors during the early stages of the new democracy may have had disproportionate effects on the creation of new institutions and long-run development. In the years following the fall of a nondemocratic regime, new parties are created, new al- liances are formed and new institutions are developed. In this sense, the early stages of a democratic period represent a critical juncture, along the lines described by Acemoglu and 1See Brender and Drazen (2005) and Keefer (2007). 2Acemoglu and Robinson (2008) provide a theoretical analysis of the incentives of elites to invest in de facto power. 3See for instance, Linz and Stepan (1996), O'Donnell and Schmitter (1986), Di Palma (1990), Huntington (1991). 4See for instance, Acemoglu and Robinson (2008), Acemoglu, Ticchi and Vindigni (2010, 2011). 1 Robinson (2012). As argued by these authors, small differences in pre-existing conditions during critical junctures can lead to a process of institutional drift that generates important differences in the level of development in the long-run. In the Indonesian context, we argue that small differences in the number of years that Soeharto mayors served during the democratic transition led to different institutional paths that affected the level of political competition and, therefore, the quality of governance in the medium- and long-run. We first document that the appointment timing of the Soeharto mayors is orthogonal to pre-determined district characteristics. We expected this to be the case, since the appointment of district mayors can be traced back to the Dutch colonial period and has historically complied with the five year term length. Any accumulation of occasional early terminations throughout history could generate a staggered pattern of appointment across districts.5 We provide evidence that the level of public good provision and socio-economic conditions at baseline do not predict the appointment timing of Soeharto mayors. Furthermore, we show that variation in support for Soeharto during the nondemocratic regime, does not predict the appointment timing either. We show this by using vote shares that Soeharto's party obtained in parliamentary elections during the Soeharto regime. In our main empirical specification, we use indicator variables for the different appointment years of the last Soeharto mayor as the main regressors of interest. The later the appointment date, the higher the exposure of Soeharto mayors during the democratic transition. We focus on the appointment timing rather than on the year when the last Soeharto mayors step down because the appointment timing precedes the fall of Soeharto and, hence, it is exogenous to political factors determined during the democratic transition. The estimates should be interpreted as capturing the \Intention To Treat" effects. Our results suggest that districts that had a Soeharto mayor for a longer period of time during the democratic transition experience worse governance outcomes and lower provision of public goods. First, we document that there is a greater prevalence of extortion and rent seeking in these districts: firms are more likely to report that they have to pay illegal fees to the military and police to protect their own security.6 Second, we provide evidence that these districts have lower provision of public goods, in particular in education. All these results persist several years after the Soeharto mayors are no longer in office and, hence, cannot be accounted for by the direct influence of Soeharto mayors. These poor governance outcomes coexist with an increase in the support for Soeharto's party: despite the lack of pre-existing differences in the support for Soeharto's party during 5Indonesia has a tradition of staggered timing of elections and appointments at different levels, such as provinces and villages. 6The military and the police were key actors in the elite capture strategies of Soeharto mayors. See Section 2 for further details. 2 the nondemocratic period, districts where the Soeharto mayor was in office for longer during the transition supported Soeharto's party to a greater extent in the 2004 parliamentary election. This set of results is consistent with the hypothesis that the presence of Soeharto mayors in office during the democratic transition facilitated elite capture. In order to better characterize the mechanism that, we argue, is behind these results, we develop a conceptual framework based on the theoretical model of Acemoglu and Robinson (2008). In their model, elites can invest in de facto power to compensate for the increase in the amount of de jure power that citizens obtain with democratization. We make a number of modifications to their model to accommodate the Indonesian context. In particular, we assume that allowing old-regime elites to stay in power for longer during the democratic transition gives them more periods to invest in de facto power. With this framework we can show that

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